British households just told the Bank of England what it didn’t want to hear. Median expectations for inflation over the next 12 months jumped to 4% in the latest survey, up from 3.2% in February, a sharp move that traces directly back to the energy shock triggered by the escalation of the US-Israeli conflict with Iran.

The BOE’s Inflation Attitudes Survey, published on June 12, paints a picture of a public growing increasingly skeptical that price stability is anywhere on the horizon.

The numbers tell a consistent story

The BOE’s survey isn’t an outlier. A separate Citi/YouGov survey showed one-year-ahead inflation expectations spiking to 5.4% in March, the highest reading since 2023. That figure cooled to 4.7% by May.

Actual UK inflation hit 3.3% in March, reversing the progress the BOE had been making toward its 2% target.

The central bank is currently holding its policy rate at 3.75%. Under various internal scenarios, the BOE estimates CPI could range anywhere from 3.5% to as high as 6.2%, depending largely on where energy prices settle. If oil stays above $120 a barrel for an extended stretch, the UK economy is looking at inflation levels that would make the post-pandemic era feel quaint.

Longer-term inflation expectations have also climbed. When households start pricing in sustained inflation over multiple years, it starts to shape wage demands, business pricing decisions, and the broader economic trajectory.

The Iran conflict sits at the center

The escalation of the US-Israeli conflict with Iran, which intensified in late February and early March, sent energy prices surging. The UK, like most of Europe, remains acutely sensitive to energy cost shocks.

BOE Governor Andrew Bailey has signaled a willingness to tolerate temporarily elevated inflation given the volatile geopolitical backdrop. But he’s also flagged the risk of “second-round effects,” the scenario where initial price shocks become embedded in the economy through higher wages and persistent price increases across sectors.

What this means for investors

Markets had been pricing in a gradual easing path for the BOE, not a return to tightening. A pivot toward hikes would ripple through UK gilts, sterling, and equity markets, particularly rate-sensitive sectors like housing and utilities.

The BOE’s next policy decision will carry more weight than usual. If the 4% expectation figure holds or climbs further in subsequent surveys, the bank may have no choice but to signal a tightening bias, regardless of how uncomfortable that feels in the middle of an energy-driven cost-of-living squeeze.